Annuities can be a valuable tool for middle-market consumers approaching retirement. By providing guaranteed income, stability and protection from longevity risk, they help fill gaps left by Social Security and savings, offering peace of mind and financial security in retirement.
With fewer Americans having access to pensions, it has become even more important for investors to take a more active role in preparing for retirement. Annuities are just one of the tools that consumers can access, but they provide several unique benefits that may make them an important consideration.
Although annuities are not suitable for everyone or the best tool for every situation, they can help address specific concerns depending on an individual’s needs and preferences. Key annuity features such as income guarantees and stability may make them especially valuable to middle-income earners.
People in this income range often have the means to save and prepare for retirement but only sometimes accumulate significant enough wealth to not worry about running out of money.
How Can Annuities Help Middle-Market Consumers?
Middle-income consumers are generally defined as households making between $50,000 and $149,900 annually. For this group, their retirement savings and Social Security will likely make up the overwhelming majority of their financial resources in retirement. While these resources are good and provide excellent benefits themselves, they may only sometimes adequately address retirees’ needs and concerns.
Social Security provides a guaranteed, inflation-adjusted payment for life. However, monthly checks are rarely extensive enough to cover retirees’ expenses. Withdrawals from retirement accounts are flexible, allowing retirees to adjust as they see fit. However, to see their accounts grow and keep pace with inflation, retirees often need to invest at least a portion of their accounts in equities. These can be more volatile than some retirees are comfortable with.
Annuities can be a good addition that helps bridge the gap between the benefits these resources provide. When included as a complete financial plan element, they can help round out retirees’ income.
Is An Annuity Right For You?
Stability Through Annuities
Many middle-income earners’ primary concerns as they transition into retirement is whether they’ll have enough money from savings and Social Security to cover their spending needs. Although they often have balances in workplace retirement plans like 401ks, the investments in these accounts are subject to market fluctuations. For some, it can be unsettling to see the value of their savings dip with the market. This can be particularly worrisome in retirement when they are taking withdrawals.
Some types of annuities can provide stability through a contractually guaranteed rate of return. A guaranteed rate shields a portion of a retiree’s savings from volatility like bonds, CDs or other fixed instruments do.
Predictable Income Through Annuities
Although systematic approaches exist to create a retirement income plan, there will always be some uncertainty. Some retirees may need help figuring out how much they can reliably withdraw from their monthly savings without taking on too much risk of depleting them.
An annuity can help reduce that risk and stress by providing a predictable income stream. Annuities can be structured to provide a fixed, guaranteed payment that lasts for the owner’s life. Knowing that retiree will receive a consistent amount each month from their annuity can offer them peace of mind and enable them to focus on enjoying their life in retirement.
By using a portion of your savings balance to purchase an annuity, you can simplify the challenge of figuring out how much you can safely withdraw, knowing you’ll have a guaranteed income base. This allows you to form a retirement budget with less uncertainty.
One popular approach is to ensure that fixed-income sources cover all necessary expenses. For example, assume you need $3,000 monthly to cover necessities. If your Social Security benefits are $2,000 per month, purchasing an annuity that pays you $1,000 monthly would close the gap.
Protection From Longevity Risk
Although a well-crafted plan that adapts to changing conditions can provide significant financial security and go a long way toward protecting retirees, there’s still a risk that your savings won’t last. One reason for this is that we simply cannot know for sure how long we will live. Longevity risk, or outliving your savings, is a significant concern, especially with increased life expectancies.
Most Americans are covered by Social Security, which provides some protection; however, it may not be enough. Annuities, particularly income annuities, help address this risk and give some shortfall cushion because their payments are guaranteed for life.
Depending on your approach, a deferred income annuity is well suited for protecting from longevity risk. These annuities begin making lifetime payments at a predetermined point in the future, such as the age of 75. By purchasing a deferred income annuity, you can feel more relaxed about your savings withdrawals, knowing that if you live past your expected age, that income will be there.
For example, suppose your family history and personal health strongly suggest you may not live past 80. You may consider planning your distribution plan so that your savings are expected to last until age 80, but purchasing a deferred income annuity with payments beginning at 80. That way, if you actually deplete your savings but live longer than you expect, you won’t be without financial support. Because deferred income annuities do not begin payments until later, they can be a very affordable option.
A comprehensive retirement income planning approach involves considering your needs, resources and preferences. Annuities can be a valuable component of your distribution plan by providing a steady stream of guaranteed income that offers protection from longevity risk and market volatility.
If you rely on your savings and Social Security to provide income in retirement, an annuity may be an excellent addition to your distribution plan.
Editor Norah Layne contributed to this article.
Guarantee financial freedom with an annuity.